How risky American home loans wiped out almost 9 million jobs
Between 2007 and 2010, a wave of missed mortgage payments in the United States rippled through Wall Street and around the world. Americans lost nearly 9 million jobs and about $13 trillion in household wealth, and employment did not climb back to its pre-crisis peak until May 2014.
The immediate trigger was the bursting of a housing bubble that peaked around 2006. Easy starter terms on loans and a long run of rising prices had tempted borrowers into risky mortgages, on the assumption they could soon refinance on better terms. When interest rates rose and prices began slipping in 2006 and 2007, refinancing became impossible, adjustable-rate payments reset higher, and defaults and foreclosures surged.
Money had poured in to fuel the boom. Large inflows from fast-growing Asian economies and oil exporters, together with low US interest rates from 2002 to 2004, made credit cheap. Lenders bundled mortgages into mortgage-backed securities and collateralised debt obligations, which paid better than government bonds and let investors worldwide bet on American housing. Much of this sat within a shadow banking system of investment banks and hedge funds that escaped the rules governing ordinary banks and could hide how much risk they carried.
Cracks showed in July 2007, when Bear Stearns revealed that two of its hedge funds holding mortgage-linked securities had collapsed, triggering forced selling. In September 2008 Lehman Brothers filed for bankruptcy, and credit to businesses and households seized up. Between January 1 and October 11, 2008, owners of US shares lost about $8 trillion, and house prices eventually fell nearly 30 per cent on average. Because the tangled institutions were too complex to wind down through bankruptcy, governments stepped in with bailouts.
Responses came on several fronts. Washington launched the Troubled Asset Relief Program and the 2009 American Recovery and Reinvestment Act, central banks cut rates, and G20 leaders met in November 2008, blaming a hunt for yield, weak underwriting, opaque products and excessive leverage. The Dodd–Frank Act later tightened financial rules. Blame is still shared out differently among banks, regulators, credit rating agencies, government housing policy and borrowers themselves, but all agree the damage spread far beyond America.
Source: Subprime mortgage crisis
